This article appeared originally in the October 2015 Levitt Letter.
The yellow metal has fallen about 40% since August 2011—from $1,900 an ounce to $1,140 [in July 2015]. Many people bought gold for the wrong reasons: 1) its glittering 18.7% average annual return between 2002 and 2011, 2) its purportedly magical inflation-fighting properties, and 3) because it’s supposed to shine in the darkest of days.
Reality, however, demonstrates that 1) gold’s long-term returns are muted, 2) it isn’t a panacea for inflation, and 3) you will put lightning in a bottle before you figure out what gold is really worth.
Owning gold is an act of faith. “Faith is the substance of things hoped for, the evidence of things not seen” (Heb. 11:1). Own gold if you feel you must, but admit honestly that you are relying on hope and imagination. The case for owning gold speaks in a whisper, not in the shouts of doomsday so customary among gold bugs.
Unlike stocks, bonds, real estate, and other financial assets, gold generates no income. Financial strategist Paul Brodsky explains, “It’s intrinsically worthless or intrinsically priceless. You can build a financial model to value it, but every input is going to be your imagination. … [The metal is] cumbersome and archaic and barbaric.”
On the other hand, gold has outpaced rises in the cost of living — but not as robustly as the alternatives. Since 1975, when private ownership of gold bullion again became legal in the U.S., it has returned an average of 0.8% annually after inflation, compared with 5% for bonds, 8.3% for stocks, and even 1.1% for cash, according to finance professor Christophe Spaenjers. Gold accounts for 1.3% of the world’s financial assets. Consequently, allocating more of your portfolio than that is beyond an act of faith; it’s a leap in the dark.
Disclaimer: These Serpent installments, while quoting financial experts, are not intended to offer any advice beyond Matt. 6:33 (“Seek first His kingdom and His righteousness, and all these things will be added to you”) and James 1:5 (“If any of you lack wisdom, let him ask of God”).